Why so many failed auctions?

One thing that’s been really on my mind lately is the number of failed auctions we’ve seen in Auckland over the last 6 to 12 months.
It astounds me that real estate agents are continuing to push this method of sale when it seems to be such a ratshit way to sell a house at the moment. One real estate agent I know is even crowing about how dumb the agent obsession with auctions is! Check out Paul Foster’s comments here.
A little bit of context…
The auction process has always been fraught with difficulty for low deposit borrowers (pretty much first home buyers). It’s difficult because this group of people have a few ducks that they need to line up before being able to get their hands in the air at an auction.
Those ducks are all required to satisfy the bank that the mortgage is something they’re willing to support for that specific property – a registered valuation being the most common and important requirement.
Of course a first home buyer could go into the auction without doing those things. But they would be extremely foolhardy, a total idiot, or just an ignoramus if they did so.
The risk is that they win the auction at a price which exceeds the registered valuation (remember, banks lend against the lower value), and they end up with a shortfall they can’t meet. I’d hate to be in that situation.
More often, it’s the fear of shelling out $1000+ for valuations and inspections only to have your first bid smoked by another bidder with more financial horsepower than you. Buying a property is stressful enough without unnecessarily flushing your money down the dunny.
Far better to find a house that’s going to market with a price on it (and that is getting slightly easier!). That way you can make a conditional offer first, knowing that you’ve got a decent shot at getting the house, so long as your conditions can be met. Even if you’re not successful you’ll have still had a fair crack at it.
Looking at that background it’s no bloody surprise to me that auctions have been getting passed in more often than not.
What about investors?
The 35% deposit rule (was 40%) imposed on investors has a role to play here too. That need for a bigger deposit has sapped many would-be investment borrowers of their former borrowing horsepower. Good job too in my view, it gives first home buyers a chance. The upshot is that all but the top-end property investors have been wiped from the market along with the frenzy that went with it.
If auctions work best in a heated market and you take away the accellerants, then it’s no wonder auctions aren’t working so well and properties get passed in.
There’s no question that auctions have a place. It’s just that in this environment, that place is no longer so obvious. Or maybe it is really obvious, it’s just that the market participants haven’t figured it out yet.
One last story.
A mate of mine recently put his first home up for sale. He was one of my first customers back in 2005. He engaged a real estate firm and they recommended he sell by auction and that they could get him approx. $900,000. He spent money on the marketing etc and took the house to market as advised.
Auction day came but no bidders showed up despite various groups coming through open homes. He was told to lower his price to induce some interest, but he was having none of that BS. He sacked the agent, demanded his marketing money back (including the for-sale sign!) and told his wife to put it on Trademe with a price of $900,000.
She did. It got a conditional offer. The conditions were subsequently met. They sold within 2 weeks for $900,000. That’s not the end of this story, but I might leave that part for another day!
I’m not saying beware of auctions… they still have their place. But I am saying be aware. Be aware of your options as a vendor, be aware of the market and how it’s selling in your neck of the woods, and be very aware of your gut instinct, not the marketing speak that flows so freely! For first home buyers, your purchase options are getting more straightforward with not every property listing in Auckland being up for auction anymore! Don’t let an auction turn you off completely, but do be aware of the added expense (and risk) that comes part and parcel with it. If you’re looking to bet in the buying groove soon, first home or moving on, now’s a great time to get in touch.